Lot Shortage Poses Next Roadblock

By Amos Maki

Local homebuilders say a dearth of developed lots is slowing down the new housing rebound, weighing down an industry still trying to drag itself out of the rubble left by the worst recession in decades.

The current inventory of developed lots in the Memphis market – which includes Crittenden County in Arkansas, DeSoto County in Mississippi, and Shelby, Tipton and Fayette counties in Tennessee – is 10,966, according to a 2014 MarketGraphics Research Group Inc. report.

From the remainder of 2014 through 2018, 20,737 lots – almost double the amount of existing lots – will need to be developed to keep pace with demand, according to MarketGraphics, which provides new housing market research to developers, builders, banks and governments across the country. Around 7,870 lots will be needed in Shelby County alone.

The worry is that the Memphis area could be left with a drastic shortage of lots and, ultimately, new homes in the most desired locations just as consumers return to the market.

“It’s hard to get your hands as a builder on the ‘A’ lots,” said Edsel Charles, founder and chairman of MarketGraphics. “In the Memphis area, and all over the country, we have a shortage of lots, especially the ‘A’ lots.’”

Developers and homebuilders said several factors – from price increases to the time it takes to actually develop a lot – aligned to produce the current lot shortage.

Today, developers may not have access to enough capital because of stricter lending standards enacted after the housing crash and recession, which can make it an uphill battle for developers to finance lots.

“Over the last seven years we haven’t competed with other developers, we’ve competed with banks,” said Gary Thompson, vice president of Boyle Investment Co., which is releasing new lots at Spring Creek Ranch.

In addition, there is a bit of sticker shock for lot developers and homebuilders as prices have risen.

In the aftermath of the recession, lenders snatched up a large amount of land and lots, offering cut-rate prices to developers over the last several years.

That slowed down traditional developers like Boyle, which couldn’t offer the same discounted rate on lots that the banks could.

“Most of these banks have been selling lots for way less than it would cost to produce,” said Thompson. “I think what it has done is not allow us to continue with development or bringing more development online because we couldn’t compete with the prices the banks were offering.”

Now that developers and builders have run through a significant amount of the supply of cheap, bank-owned lots, builders are now adjusting to more normal lot pricing structures.

“There’s a big gap between what banks have been selling them for and what people have been paying for and it’s a shock,” Thompson said. “If there’s going to be new housing stock moving forward they’re going to be on new lots and they’re going to be more costly so there has to be an adjustment.”

Charles Morgan of Vintage Homes LLC said the Memphis area appears to have settled into a pattern where banks and developers have found lot development unappealing.

“If you’re a lender or developer the risk-reward just isn’t there,” Morgan said.

Kim Grant Brown, president of the West Tennessee Home Builders Association, and other builders said high municipal fees, combined with the cost and time it takes to install utilities, have made it difficult for developers, and later builders, to turn a profit.

The lot shortage is manifesting itself just as the homebuilding industry – a key sector of the construction industry – showed improvement in 2013.

Homebuilders filed 870 permits in 2013, down 5.2 percent from 918 permits filed in 2012, but still far above the 698 permits filed in 2011, according to real estate information company Chandler Reports,www.chandlerreports.com.

But activity this year is off last year’s pace. Through the first six months of the year, builders have pulled 436 permits, down 17.6 percent from 529 permits pulled over the same period last year.

“I believe a combination of the weather and the ongoing lot shortage are the two main issues causing permit numbers to fall,” Brown said.